#1 Guide to understand Simple Moving Average formula + Advanced trading ideas to use a 10-period SMA

Moving averages are the indicators very commonly used in the trading world. Today we will discuss the Simple Moving Average formula as thoroughly as possible. There are different types of them and you can change their periods so you will obtain different results. You may also use them in various manners. Do you want to know some advanced techniques for using a 10-period Simple Moving Average? Then read today's article.

The basics of the Simple Moving Average

Moving averages calculate the average price within a certain period of time. If we take a 10-day SMA it will calculate the average price of 10 last candles.

The Simple Moving Average appears in the form of a line on the price chart. The line is created when the single values are joined together.

Simple moving average formula

Calculations for the SMA10 are simple. It takes 10 last closing prices and divides them by 10. Let's see the example.

The closing prices during the last 10 days were $10, $11, $12, $13, $14, $15, $16, $17, $18 and $19. We need to add all the values;

10+11+12+13+14+15+16+17+18+19 = 145,

and divide the result by 10;

145/10 = 14,5.

The average price for the last 10 days is $14,5.

When the following day the price closes at $25, we just need to do the same calculations for the last 10 days. Which is:

11+12+13+14+15+16+17+18+19+25 = 160

160/10 = 16.

So the average price now is $16. We calculated this using the formula for simple moving average.

If you want to calculate the average for a different number of candles apply this simple moving average formula:

SMA = [p₁+p₂+p₃+…pₙ] / n

where p is a price (usually the closing price) and n is a number of periods.

New ideas to use a 10-day Simple Moving Average on IQ Option

Our SMA10 is a short-term indicator but we can still use it in various ways. Let's discuss some ideas.

Pros and Cons 😃😔

Pros:

• Easy to understand and calculate
• Helps identify trends and potential entry points
• Can be used as a dynamic stop loss
• Applicable to various timeframes and assets

Cons:

• May generate false signals in range-bound markets
• Not as responsive to sudden price changes as other moving averages (e.g., Exponential Moving Average)
• May lag behind actual price movements

Profiting from fast-moving markets

The first thing is to recognise the strong trend in the market. How do you do that? Look at the chart and check whether the price respects the SMA10. A good indication of a strong trend is received when the price bounces from the SMA line at least twice.

Once you have identified a strongly trending market you should not hurry with stepping in. Instead, allow the market to pull back towards the SMA10. Enter on the opening of the next candle after a bearish (for the downtrend) or bullish (for the uptrend) price rejection. It can be, for instance, a bearish engulfing pattern or a hammer. This will give us a confirmation for opening our position.

Using the inside bar breakout

We call the inside bar the candle that is completely engulfed by the previous bar. Such a pattern reveals the indecision of buyers and sellers.

When the price is trending without pullbacks for some time, you can use the inside bar breakout to time your trade. You should enter after the inside bar pattern is broken. You may secure your position by placing a stop loss above the high (in the uptrend) or below the low (in the downtrend) of the inside bar.

Using the SMA10 as a dynamic stop loss

The price seems to respect the SMA as we have already said. The moving average acts as dynamic support (in the uptrend) or resistance (during the downtrend). And so you can use its line to trail your exit position.

Close your transactions when the price breaks above the SMA10 (for the uptrend) or below it (in the downtrend) as it means the market may reverse.

The bottom line

The moving average is a great indicator that measures the average price within a certain time. The Simple Moving Average formula with a period of 10 takes the last 10 days into calculations.

We can use the SMA10 to catch good entry points in fast-moving markets. These are when the price rejection is confirmed or the inside bar is broken.

The price respects the SMA line and so you can also use it as a dynamic stop loss.

I hope the above ideas will improve your trading performance. Practice using the Simple Moving Average in the IQ Option demo account first because you do not risk your money there.

Best of luck!

Q&A: Frequently Asked Questions 💡

• Q: What is the difference between a Simple Moving Average (SMA) and an Exponential Moving Average (EMA)?
  A: An SMA calculates the average price over a specific period, while an EMA places more weight on recent price data, making it more responsive to price changes.
• Q: Can I use different SMA periods for my trading strategy?
  A: Yes, you can use various periods for your SMA, such as 20, 50, or 200, depending on your trading style and the timeframe you are analyzing.
• Q: How can I avoid false signals generated by SMAs in range-bound markets?
  A: Use other technical indicators, like the Relative Strength Index (RSI) or Bollinger Bands, to complement your analysis and confirm the validity of SMA signals.
• Q: Are SMAs suitable for all types of trading?
  A: SMAs can be applied to various trading styles, such as day trading, swing trading, and long-term investing, by adjusting the period and timeframe accordingly.
• Q: Can SMAs be used with other technical indicators?
  A: Yes, SMAs can be combined with other technical indicators like RSI, MACD, and Bollinger Bands to improve the accuracy of your trading signals.